12. Monetry Policy in India.ppt

8/19/2019 12. Monetry Policy in India.ppt

1/20

Monetary Policy of IndiaMonetary Policy of India

The R.B.I. has managed monetary affairs ofThe R.B.I. has managed monetary affairs ofthe Country, especially the control,the Country, especially the control,

regulation and allocation of bank credit asregulation and allocation of bank credit as

and when reuired.and when reuired.!b"ecti#e of the Monetary Policy in India!b"ecti#e of the Monetary Policy in India

$%$% &conomic growth&conomic growth

'%'% (ocial and economic "ustice, i.e., an(ocial and economic "ustice, i.e., aneuitable distribution of incomeeuitable distribution of income

)%)% Price stabilityPrice stability


2/20

Monetary Policy of IndiaMonetary Policy of India

Monetary Policy has tried to maintain a "udiciousMonetary Policy has tried to maintain a "udicious

balance between price stability and economicbalance between price stability and economic

growthgrowth

*ith changing economic conditions of the Country,*ith changing economic conditions of the Country,

the R.B.I. has been changing monetary policythe R.B.I. has been changing monetary policyob"ecti#es, and has been using a combination ofob"ecti#es, and has been using a combination of

monetary policy instruments to achie#e its tmonetary policy instruments to achie#e its targetar

get ..


3/20

Price (tabili+ationPrice (tabili+ation

rom time to time, inflation had beenrom time to time, inflation had beentroubling ustroubling us

India had inflation rate of abo#e - percentIndia had inflation rate of abo#e - percent

during the period from $/- to $0120$during the period from $/- to $0120$

The a#erage rate of inflation shot up to $'The a#erage rate of inflation shot up to $'

percentpercent

0./ percent inflation rate a#eraged during0./ percent inflation rate a#eraged during

$12$ inflation, rate declined$12$ inflation, rate declined


4/20

Price (tabili+ationPrice (tabili+ation

3gain inflation rate went up to $' p.c 3gain inflation rate went up to $' p.c

an annual inflation rate of 4 percent isan annual inflation rate of 4 percent isconsidered socially tolerable and conduci#econsidered socially tolerable and conduci#e

to growth.to growth.


5/20

R.B.I.5s RegulationR.B.I.5s Regulation

R.B.I. has been acting as a Regulator ofR.B.I. has been acting as a Regulator ofMonetary (ystem.Monetary (ystem.

Monetary measures used by R.B.I. gi#enMonetary measures used by R.B.I. gi#en

belowbelowBank rate policy:-Bank rate policy:- The bank rate remainedThe bank rate remaineduncharged at ) percent during $)/2$/1.uncharged at ) percent during $)/2$/1.since $/$, bank rate has been freuentlysince $/$, bank rate has been freuentlychanged 6mainly increased%changed 6mainly increased%

R.B.I. kept reducing bank rate for the yearR.B.I. kept reducing bank rate for the year$0which continued till '117$0which continued till '117


6/20

R.B.I.5s RegulationR.B.I.5s Regulation

R.B.I. started enhancing the bank rate andR.B.I. started enhancing the bank rate and

raised it to 0./ percent in '117 due to rate ofraised it to 0./ percent in '117 due to rate ofinflation crossing double digitinflation crossing double digit

There was a fall in the inflation rate in lateThere was a fall in the inflation rate in late

'117, so, the bank 8 rate was cut 8 down to -'117, so, the bank 8 rate was cut 8 down to -percent in 9anuary '11.percent in 9anuary '11.


7/20

3ssessment 3ssessment

India5s e:perience shows that the bank rateIndia5s e:perience shows that the bank rate

has not pro#ed to be an effecti#e method ofhas not pro#ed to be an effecti#e method ofcontrolling money 8 supplycontrolling money 8 supply

Com. Banks do not depend on the R.B.I.Com. Banks do not depend on the R.B.I.

greatly for their financial 8 reuirements.greatly for their financial 8 reuirements.

There are other sources of credit.There are other sources of credit.


8/20

Cash Reser#e RatioCash Reser#e Ratio

The C.R.R is another monetary tool ofThe C.R.R is another monetary tool ofregulation to control a#ailability of credit inregulation to control a#ailability of credit in

the economythe economy

C.R.R. refers to the percentage of totalC.R.R. refers to the percentage of totaldeposits which commercial banks aredeposits which commercial banks are

reuired to maintain in the from of ;cashreuired to maintain in the from of ;cash

reser#es< the cash 8 reser#es are di#idedreser#es< the cash 8 reser#es are di#ided

under two heads.under two heads.

$.$. Reuired reser#es 6RR% andReuired reser#es 6RR% and

'.'. &:cess reser#e&:cess reser#e


9/20

Cash Reser#e RatioCash Reser#e Ratio

The reuired reser#e is the cash reser#e thatThe reuired reser#e is the cash reser#e thatcommercial banks are statutorily reuired tocommercial banks are statutorily reuired tomaintain with the R.B.I. 6) pc. to $/ pc.%maintain with the R.B.I. 6) pc. to $/ pc.%

The e:cess 8 reser#e is the cash reser#e whichThe e:cess 8 reser#e is the cash reser#e which

maintain as cash in hand with the purpose ofmaintain as cash in hand with the purpose ofmeeting the currency demand by the depositorsmeeting the currency demand by the depositors

The e:cess reser#es are determined generallyThe e:cess reser#es are determined generallyby the banks own e:perience regardingby the banks own e:perience regarding

;currency 8 drain


10/20

(tatutory =iuidity Ratio 6(=R%(tatutory =iuidity Ratio 6(=R%

>nder the (=R scheduled commercial banks>nder the (=R scheduled commercial banksare reuired by statute to maintain a certainare reuired by statute to maintain a certain

percentage of their total deposits in the formpercentage of their total deposits in the form

of liuid assets.of liuid assets.=iuid assets are, bonds of I?BI,=iuid assets are, bonds of I?BI,

?e#elopment banks,?e#elopment banks,

*hen R.B.I. wants to increase supply of*hen R.B.I. wants to increase supply ofcredit, it reduces the (=Rcredit, it reduces the (=R

There days it (RR is around '/ percent.There days it (RR is around '/ percent.


11/20

!pen Market !perations!pen Market !perations

!pen 8 Market operations was not used!pen 8 Market operations was not used

during the $015s and the first half of theduring the $015s and the first half of the

$715s$715sThe interest 8 rate on @o#t. securities wasThe interest 8 rate on @o#t. securities was

raised during the late $715sraised during the late $715s

(cheduled 8 commercial banks were granted(cheduled 8 commercial banks were grantedfreedom to determine their own prime 8freedom to determine their own prime 8

lending rates.lending rates.


12/20

!pen Market !perations!pen Market !perations

The go#t. bonds were earlier not #ery popularThe go#t. bonds were earlier not #ery popular

because of low rate of returns, than the marketbecause of low rate of returns, than the market

rate of interest.rate of interest. 3nother reason, for less effecti#eness of the 3nother reason, for less effecti#eness of the

security market, especially the bill market, issecurity market, especially the bill market, is

not yet well de#eloped and fully organised,not yet well de#eloped and fully organised,and the go#t. securities market is almost non 8and the go#t. securities market is almost non 8

e:istent.e:istent.


13/20

The Repo RateA 3 ew Monetary ToolThe Repo RateA 3 ew Monetary Tool

>nder the repo system, the R.B.I. buys>nder the repo system, the R.B.I. buyssecurities back from the banks and therebysecurities back from the banks and thereby

pro#ides funds to the bankspro#ides funds to the banks

It is a form of the lending money to the banksIt is a form of the lending money to the banksfor a short period $ 8 $4 daysfor a short period $ 8 $4 days

The rate of interest at which the R.B.I. lendsThe rate of interest at which the R.B.I. lends

money to the bank is the repo ratemoney to the bank is the repo rateThere is re#erse 8 repo rate it is the rate atThere is re#erse 8 repo rate it is the rate at

which the banks can sell the securities to thewhich the banks can sell the securities to the

R.B.I.R.B.I.


14/20

The Repo RateA 3 ew Monetary ToolThe Repo RateA 3 ew Monetary Tool

*hen the ob"ecti#e is to control the money*hen the ob"ecti#e is to control the money

supply, the R.B.I. uses the re#erse repo ratesupply, the R.B.I. uses the re#erse repo rate

and increases, the repo rate.and increases, the repo rate.*hen the central 8 bank aims at increasing*hen the central 8 bank aims at increasing

liuidity 6or money 8 supply%, it buys backliuidity 6or money 8 supply%, it buys back

the securities. This increases the funds withthe securities. This increases the funds withcommercial banks which can be used tocommercial banks which can be used to

create credit 6gi#e more loans%create credit 6gi#e more loans%


15/20


16/20

aluation of India5s Monetary Policyaluation of India5s Monetary Policy

).). ?uring a period of )/ years, 6$-12-$ to?uring a period of )/ years, 6$-12-$ to$/2-%, the monetary policy was$/2-%, the monetary policy wasunsuccessful in achie#ing its ob"ecti#esunsuccessful in achie#ing its ob"ecti#es

4.4. Inflation 8 rate was uite within theInflation 8 rate was uite within thedesirable limit 42/ percent during $/ 8 -desirable limit 42/ percent during $/ 8 -to '11- 8 10to '11- 8 10

/./. To conclude we may say, that, things mightTo conclude we may say, that, things mightbe much worse in the absence of monetarybe much worse in the absence of monetarycontrols adopted by the R.B.I.controls adopted by the R.B.I.


17/20


18/20

=imitations E &ffecti#eness of Monetary=imitations E &ffecti#eness of Monetary

PolicyPolicy

The outside Lag:-The outside Lag:- refers to the time takenrefers to the time taken

by the households and the firms to react toby the households and the firms to react to

the policy 8 action taken by the monetarythe policy 8 action taken by the monetaryauthorities. It has been obser#ed that, whenauthorities. It has been obser#ed that, when

preparatory lags and operational lags arepreparatory lags and operational lags are

long, not only the nature and the magnitudelong, not only the nature and the magnitude

of the problem may change rendering theof the problem may change rendering the

policy ineffecti#e. It may worsen the situation.policy ineffecti#e. It may worsen the situation.


19/20

Problem in orecastingProblem in orecasting

orecasters may misread the current state oforecasters may misread the current state of

the economy. orecasters has not reachedthe economy. orecasters has not reached

perfection, particularly at ma"or turning pointsperfection, particularly at ma"or turning points

in the economyin the economyThe presence and growth of Non-bankingThe presence and growth of Non-banking

Financial intermediaries:-Financial intermediaries:- Rapid growth ofRapid growth of

non2banking financial intermediaries hasnon2banking financial intermediaries hasreduced the scope of effecti#eness of thisreduced the scope of effecti#eness of this

policy. The share of the commercial banks inpolicy. The share of the commercial banks in

the total credit has been reducedthe total credit has been reduced


20/20

>nderde#eloped Money and>nderde#eloped Money and

Capital MarketsCapital Markets

In countries like India, effecti#eness ofIn countries like India, effecti#eness of

monetary policy is reduced considerablymonetary policy is reduced considerablybecause of the under 8 de#eloped naturebecause of the under 8 de#eloped nature

of their money and capital 8 markets.of their money and capital 8 markets.

12. Monetry Policy in India.ppt

Documents

Transcript of 12. Monetry Policy in India.ppt